AI lit the spark. Earnings are keeping the rally alive.
Last year's market was about AI. This year's market is about earnings. Profits are strong, margins are stabilizing, and-while Big Tech still leads-strength is starting to spread across sectors.
That shift matters for anyone managing capital or planning budgets. Price action driven by story fades; cash flow doesn't. The bull case is moving from narrative to numbers.
What the latest earnings say
- Beat rates: With over 90% of the S&P 500 reported, 82% beat EPS estimates.
- Profit growth: S&P 500 earnings rose 13.1% year over year-fourth straight quarter of double-digit growth.
- Broadening: 6 of 11 sectors posted earnings gains, led by Technology, Financials, and Consumer Discretionary.
- Concentration still high: The "Magnificent Seven" are tracking ~23% net income growth vs. ~12% for the rest of the index.
- Quality of beats: Revenue upside remains above historical norms, a sign of real demand and firming pricing.
Breadth is improving-slowly
Equity desks note "clear signs that the earnings recovery is underway" and that pricing power is firming. Revisions have turned higher, and breadth is creeping in the right direction.
There's still caution. As one strategist put it, earnings sentiment "staged a partial comeback," but revisions sit below summer highs. Last week's pullback was "the thunder that can be heard from a storm gathering in the distance." Translation: investors want proof the broadening sticks.
A K-shaped market, but healthier than the dot-com era
AI-linked and high-quality growth names continue to outpace the median stock-classic K-shape. The difference today: participation is solid enough to support further upside, and top-10 valuations aren't wildly stretched even at ~40% of index weight.
Street targets reflect that view. Some houses see the S&P 500 reaching 7,500-7,750 by year-end 2026, underpinned by mid-teens earnings growth that widens beyond tech as capex diffuses. AI spend is "eye-watering," echoing the mid-1990s buildout that preceded a long productivity upswing.
What this means for finance teams and investors
- Positioning: Stay overweight quality growth and AI infrastructure beneficiaries, paired with Financials and selective Consumer Discretionary to capture early breadth.
- Breadth as a risk gauge: Track the share of sectors with positive YoY EPS and the proportion of companies with upward revisions. Sustained improvement is your green light.
- Margins matter more than narratives: Watch gross and operating margin inflections-pricing power plus cost discipline is the throughline of this season.
- Capex diffusion: Follow where AI spend flows next (semis, cloud, power, data center supply chain). Wider capex = better earnings resilience.
- Concentration management: Respect the top-10 weight. Use position limits, downside hedges, and rebalance rules to avoid single-theme risk.
- Cash flow over vibes: Favor firms converting revenue beats into free cash flow and buybacks, not just guidance theater.
Key signals to watch next quarter
- Beat/miss spread vs. 5- and 10-year averages on both revenue and EPS.
- Revision breadth: net upward vs. downward EPS revisions across the index.
- Sector participation: earnings growth in 7+ sectors would confirm broadening.
- Margin trend: sequential expansion across more industries, not just mega-cap tech.
- Valuation vs. growth: multiple expansion supported by forward EPS, not hope.
- Top-10 concentration drift: stability is fine; acceleration is a yellow flag.
Why this cycle could persist
AI remains the catalyst, but the engine is shifting to earnings. If revisions keep grinding higher and margins hold, the bull market has staying power beyond a handful of tickers.
The risk is simple: if breadth stalls, volatility returns. Keep a barbell, favor cash generators, and let the data-not headlines-steer exposure.
Resources
- FactSet Earnings Insight for beat rates, margins, and revisions.
- S&P 500 methodology and sector composition to monitor concentration and breadth.
- Practical AI tools for finance workflows to evaluate productivity gains tied to current capex trends.
Your membership also unlocks:
